- Coffee has pushed higher so negating the March to late April decline
- Market sentiment is bullish at every time measure
- The market has a high degree of volatility
- There is a mild sentiment of being overbought, however, look to be contrarian
Coffee has staged a break higher of 14.51% since June 23 when spot managed to break above the 50-day moving average. After the short duration “flattish” channel, the spot has surprised many market participants with a solidly bullish technical aspect.
Figure1: Coffee Dec20 (KCZ0) 12-Month Chart and Time Technicals Source: www.investing.com , Spotlight Ideas
Prices are set to deliver the strongest quarterly return since 2014 so making Coffee the best performer among the leading commodity contracts.
Market Exit & Weather in Brazil
Driving the prices has been the exit from the market of several producers after prices fell steadily during March and June. Prices staged a rebound when bad weather in Brazil placed a serious threat to production in the leading global grower and exporter. The fear that the market for coffee would see an excess level of demand began to shift the price to the upside.
This was to be expected as a simple principle of microeconomics, however, it was the degree of volatility that really surprised the market. In the last two months the price volatility as prices have recovered has closely matched the pattern from March to May when prices fell.
Figure2: Coffee Price Volatility During 2020 Source: www.investing.com , Spotlight Ideas
Bull Bias Is Believable
I am taking a positive view on coffee as I see the momentum persisting with prices ready to break over the current level of US Cents123.10/lb.
I am looking for a challenge above 130, indeed I am happy to be long with a drive to 138 in mind.
There will be rotation inside the impulsive channel and as such there may well be minor down days. One can have a trailing stop that can be moved to each key lower bound.
Buy at 123.10 Target 138 with a view to aim higher. Keep a good stop in play, today this is set at 122.00
